Work in progress valuation in project organisations

• March 9, 2021
• 4 minutes
• Strategic advice & implementation

In project organisations, it is important to have good insights into the productivity of direct staff, the amount of coverage built up in the projects, the profitability on projects and more. However, The financial reporting often only shows the total turnover and the total costs. In almost all cases, the invoiced instalments and the spent costs are also directly included in the profit and loss account. As a result, the fluctuation in the period results is very large. Only when the annual accounts are drawn up, well beyond the end of the financial year and when it is already too late to make any adjustments, the accountant determines the status of the work in progress. Only then are adjustments made in regard to the result. The company lacks insights into its working capital position during the year, because this does not happen in the interim. The consequence of this situation is that it is impossible to create a view of the future development of results and liquidity.

Adjusting the format of the management report

To increase insights, the format of the monthly report will have to deviate from the standard annual accounts in certain respects. A good way to show the available data is:

With this, the coverage of general costs and the costs of hours for direct personnel and the machines are presented above the gross margin. With this, the presented gross margin should be equal to the gross margin of the projects. In this example, the average project result is therefore 9.3%.

This format also shows whether the coverage for personnel costs, machine costs and general costs is sufficient. In this example, they are only insufficient, as a result of which the company’s bottom line is negative.

Periodic and unambiguous review of work in progress

The development of the work in progress must be periodically considered. Each period, the following questions must be answered:

• What is the progress rate of all projects in progress?
• What costs (materials, third-party work, own hours) must still be incurred to successfully complete the project?
• What is the result to be allocated to the past period? The POC method is used here.
• What will be the outcome of the project when it is completed?
• Do we expect a negative result at the end of certain projects?
• How efficient has the deployment of direct staff been this period?

By increasing this insights, the company can manage projects more effectively. It is possible to quickly identify whether the gross margin on the projects is declining. It is also possible to monitor the productivity of the direct personnel involved in the projects. You can also see whether the indirect costs are still in proportion to the return of the projects.

Do you have a project organisation and are you curious as to what the above adjustments can bring your organisation? Feel free to contact us for a cup of coffee.